Drop in profit for Fonterra

Fonterra has posted a 53% drop in net profit for the half
year to January, highlighting again the issues it has had
with capacity constraints.

Profit dropped from $459 million to $217 million, and
normalised earnings before interest and tax (ebit) were down
41% to $403 million, while revenue was up 21% to $11.3
billion.

The dairy giant has also maintained its forecast cash payout
of $8.75, comprising a farmgate milk price of $8.65kg ms and
a 10c dividend.

The profit struggles reflected the high input costs as well
as the massive growth in global dairy demand that had
exceeded all expectations, ASB rural economist Nathan Penny
said.

While Fonterra anticipated high growth and had done well, it
did not anticipate growth would be on that scale and it had
effectively run out of milk powder processing capacity.

Meanwhile, it had to run its cheese and casein plants at a
loss as cheese and casein prices lagged well behind milk
powder prices, Mr Penny said.

Yesterday, Fonterra announced it was bringing forward planned
capital investments, resulting in additional capital
expenditure of $400 million to $500 million over the next
three to four years.

Until that extra capacity came on line, there would be upward
pressure at the margin on milk powder prices, particularly in
whole milk powder markets given Fonterra's dominance, Mr
Penny said.

Craigs Investment Partners broker Peter McIntyre said the
market had taken the announcement ''in its stride''.

After trading between $6.10 and $6.20 on Tuesday, the
Fonterra Shareholders' Fund lifted to $6.26 yesterday
morning.

Despite profit being down, Fonterra was ''still making
money'', although it was finding it harder to do so in the
current environment, Mr McIntyre said.

He suspected Fonterra would find some relief over the next 12
to 18 months, as high commodity prices ''probably won't stay
there forever''.

The co-operative was reinvesting in its business, which would
please farmers, and farmers would also be ''pretty
satisfied'' with the forecast milk price.

An $8.75 forecast payout represented close to $14 billion
being injected into the New Zealand economy, which was
''pretty massive'', he said.

Forsyth Barr broker Haley Van Leeuwen said volatility in
earnings of the levels experienced by Fonterra from the first
half of 2013 to the first half of 2014 was unsustainable.

It was ''extremely challenging'' for investors to forecast an
underlying level of sustainable earnings for Fonterra, given
the board had the ability to engineer a profit outcome, she
said.

Federated Farmers dairy chairman Willy Leferink said the
focus should be on revenue, rather than the fall in profit,
as that was ''real money'' coming into the New Zealand
economy.

The fall in profit was concerning and reflected the higher
cost of milk. Shareholders also needed to ''ask questions''
because the 10c dividend left ''a little bit of a sour
taste'' in an otherwise spectacular half year, Mr Leferink
said.